Insurance Agency Loans – Financing an Insurance Brokerage

Financing For Insurance Agencies

At one time in the United States, insurance companies didn’t sell their products directly to consumers. Instead, anyone looking to purchase insurance for personal or commercial use had no choice but to obtain the insurance through a local or national insurance agency or brokerage. Now with the internet, a consumer can easily browse the web and purchase their insurance directly from the insurance company. Even more, they can compare and purchase insurance plans through the use of online platforms and portals. These transformations have put enormous stress on small independent insurance agency and insurance brokers who are doing their best to adjust to the transformation in the way insurance coverage is being supplied. In this article we will take a look at the insurance industry as a whole, as well as the financing options available to help small insurance agencies in their ever-changing business environment.

What is Insurance?

Understanding the basics of insurance begins with determining the broadest types of insurance coverage you are looking for; this usually depends on the person buying it, such as a family looking for health insurance coverage or a business owner looking for property insurance coverage. The most common type of insurance that the average person is looking for is personal insurance. Personal insurance coverage is essentially insurance purchased by an individual or a family that is looking to cover themselves and their family members for their own risk needs. This type of insurance coverage typically includes health care coverage, disability coverage, homeowner coverage, and so forth. The next type of insurance that people often use is called group insurance. Group insurance coverage is typically provided by a person’s employer and is available to all of the employee’s in the company (or sometimes only for full-time employees). Through group insurance, coverage usually consists of life insurance, health care insurance, disability insurance, and pension plans. The last major type of insurance is commercial insurance, which is mainly acquired from business owners and other organizations that need to have property and casualty insurance coverage. In most cases, a specific insurance company, such as an automobile insurance company, will have separate divisions throughout the company to deal with these three specific types of insurance coverage. There are a variety of types of insurers within those divisions, such as stock insurers, mutual insurers, self-insurance, and state and federal insuring organizations.

What are the Types of Insurance?

Now that there is a basic understanding of the three major categories for insurance coverage, we need a breakdown of the major segments of insurance coverage companies, as well as their unique attributes.

Standard Carrier (Admitted) Insurance: Standard insurance, otherwise known as admitted insurance, is the traditional form of insurance that most people are aware of. With this type of insurance coverage, low risk families and businesses are the key demographic. Standard insurance companies typically deal with business owner policies, homeowners insurance, automobile and motorcycle insurance, boat insurance, and so forth. This type of insurance company has a license to sell specific lines of insurance in a particular state, and has rates that are regulated through the state board of insurance in the particular state that they are offering coverage. The benefits of standard carrier insurance include the fact that these companies are bound by mandates that are strictly regulated to protect policyholders from fraud.

Excess and Surplus Lines of Insurance: This type of insurance is also known as E&S, specialty lines, surplus insurance, and hard-to-place business. This type of insurance coverage is predominately run by smaller insurance companies. These types of insurance companies tend to deal with high specialty risks or high risk individuals who were refused by standard carriers to cover their needs. Examples of excess and surplus insurance coverage include aviation liability insurance, protection for a demolition business, explosive manufacturing, firearms makers, and businesses that do not fit standard market underwriting, such as vacant properties or taxi cabs. While this type of insurance coverage only accounts for less than 7% of the market, without excess and surplus lines of insurance, too many people and businesses would go uninsured without it.

Captives: Captive insurance companies have been around for over 100 years, however it has been within the past 30 years that the captive insurance market has seen significant growth. According to the National Association of Insurance Commissioners, there are over 7,000 captive insurance companies globally, making this an incredibly competitive market today. Essentially, captive insurance companies are a form of self-insurance that is owned solely by one or more non-insurance companies, or ”the insurer is wholly owned by the insured”. There is a variety of established ways to use captive insurances, and the market is only getting more and more creative with its definition of a captive insurance company.

Direct Writer or Seller: A direct seller of insurance is an insurance company that does not have independent representatives, otherwise known as insurance agents. When using a direct seller, people looking to purchase insurance will deal directly with the company and their employees; Geico and Progressive are well-known examples of direct seller insurance companies. People tend to prefer to use independent insurance agents, since they represent multiple companies, who are aware of other options and services for your specific needs when deciding on a policy.

Domestic and Foreign Insurance Companies: A domestic insurance company is an insurer that is formed under the laws of the state in which a company is located and operates in. For example, if your business is created in California and your business and agents meet the licensing requirements of California, than you are considered a domestic insurance company. If a domestic insurance company is looking to expand into another state, it is then considered a foreign insurance company in the other states. So, going back to the domestic insurance company example, a domestic company based in California that opens up a new location in Oregon is the considered a foreign insurance company in Oregon.

Insurance Agency Loan Comparisons

Types	Rates	Terms	Funding
Bank	6-10%	3-7 years	14-30 days
SBA	6-10%	3-7 years	10-30 days
Alternative	6-25%	1-5 years	5-7 days
Cash Advance	1.16-1.55	3-24 months	1-3 days
Invoice Finance	1-2% weekly	1 – 90 days	1-3 days

Agency Bank Loans

A traditional bank term loan or line-of-credit are clearly the superior lending product for insurance agencies seeking capital. Bank financing for insurance companies have rates that start in the mid single digits, and terms ranging up to 20 years (depending upon use). Good credit is required, as well as strong financials and possibly collateral.

Documents insurance agencies and brokers need include:

Insurance agency tax returns (3 years)
Insurance agency income statements (year-to-date)
Insurance agency balance sheets (year-to-date)
Schedule of liabilities (list of all business debt)
Agency owner’s personal tax returns (3 years)
Personal financial statement

SBA Insurance Agency Loans

The next best financing option for insurance agencies after a traditional bank loan would be SBA financing. SBA loans aren’t government business loans, but instead a loan provided by a traditional lender in which the government agrees to cover a percentage of the lender’s losses if the insurance agency should default on their loan. Rates are similar to traditional bank loans, and terms are comparable.

Insurance agencies will need to provide the following documentation when applying with a SBA lender:

Agency business tax returns (3 years)
Agency income statements (year-to-date)
Agency balance sheets (year-to-date)
Schedule of liabilities (list of all business debt)
Personal tax returns (3 years)
Personal financial statement

Alternative Insurance Company Loans

If an agency is unable to secure traditional or SBA financing, the next best option would be to seek an alternative business loan. Mid prime alternative lending is the mid-path between bank loans and high-interest high-risk business cash advances. Rates start in the low teens and terms can be as long as 5 years.

Documents an insurance company needs to apply with an alternative lender include:

Agency business tax returns (2 years)
Agency income statements (year-to-date)
Agency balance sheets (year-to-date)
Schedule of liabilities (list of all business debt)
Personal tax returns (1 year)

Asset Based Loans

Asset based business loans are an option for insurance brokers who own commercial or residential real estate, and would like to obtain a 2nd or 3rd position on the real estate as collateral for business financing. Qualified real estate can receive up to 50% funding on its equity value.

Documents needed for asset based lending on personal or commercial real estate include:

Application
Bank statements (proof of cash flow)
List of collateral
Appraisal

Insurance Agency Cash Advance

If all else fails, the next best option would be to obtain a merchant cash advance or ACH business loan. Merchant cash advances are the sale of future credit card and/or banking deposits at a discount. A lender will agree to purchase the future receivables, forward the insurance agency the purchase amount, and then collect repayments by remitting a percentage of the agency’s daily credit card or bank account deposits.